Unexpected strong data on the US labor market did not affect the US dollar. After a short increase near the 97th figure, the USD index again turned down and fell into a drift in the range 96.54-96.90. The data on nonfarm payrolls became a catalyst for a rise in the demand for risky assets, and the dollar, which has recently been in high demand due to outbursts of anti-risk sentiment, once again demonstrated its vulnerability. The failure of the bulls to rally the dollar amid strong statistics suggests that only a strong news can return demand to its previous levels.
The dollar can demonstrate a large-scale recovery in two ways: first is an increase in demand for safe-haven assets, and second is the decision of the US Fed to tighten its rhetoric amid growing key macroeconomic statistics. The data on nonfarm payrolls already signaled the recovery of the labor market, but ahead is an equally important data on inflation, in which judging by indirect signs, problems may arise.
From official forecasts, negative dynamics are to be expected. General consumer price index is expected to reach zero in May (on a monthly basis), and slow down by 0.2% in annual terms. Core inflation will also demonstrate a similar trend, revealing a zero growth in monthly terms and a slowdown of 1.3% year on year.
Indirect indicators also suggest that inflation slowed significantly in May despite the gradual lifting of quarantine restrictions in the second half of last month. According to the latest data on nonfarm payrolls, salaries were on a negative trend, in which average hourly wage was already on a decline in April due to the massive lay-offs of low-paid workers and their lower wages, so the data for May crashed the indicator into the negative area, immediately amounting to -1%.
The decline in economic activity, as well as the record drop in oil also affected consumer inflation. One of the most important indicators of the Fed, the PCE Price Index, increased by only 0.5% in April in annual terms, while the core index (excluding food and energy prices) grew by only 1%. Consumer inflation (CPI) also collapsed to 0.3% y / y from the previous level of 1.5%, and PPI inflation slowed down by more than what was expected. The latest data also reveals that PPI slowed down to -1.3% m / m in April, worse than economists forecast of -0.5%, and excluding food and energy, the situation is no better, as the decrease was -0.3% (worse than the forecast of -0.1%). In annual terms, a similar dynamic was recorded. The indicators came out in the “red zone”, significantly not reaching the forecast values.
The CPI, which will come out tomorrow, also seems to level with the results of the nonfarm payrolls. It will be published just a few hours before the Fed press conference, the announcements from which could put significant pressure on the dollar. The USD index could move downwards tomorrow, at least to the base of the 96th figure.
The market is confident that the Fed will not change the monetary policy in June, and with regards to subsequent rhetoric, supporters are sure that the dollar will arise from the strong pressure, since Fed Chairman Jerome Powell has repeatedly stated that the regulator will continue using all available tools if necessary, until the crisis on the coronavirus ends.
Other supporters, meanwhile, claim that Powell only focuses on strong reports on the US labor market, identifying it as a starting point for the recovery of the US economy. Powell may hint at the need to exit the regime of extreme incentive measures, but the meeting is sure to publish long-term forecasts, which certainly will not please dollar bulls, as they have a high chance of being negative.
Given such disposition, it is not surprising that the USD index froze in place, fluctuating in a fairly narrow range. Traders are careful and prudent, preferring to wait out the period of uncertainty.
The same can be said on the EUR/USD pair, as the quotes formed a flat on the second day, amid the efforts of the bulls to return the price to the 13th figure and similar attempts of the bears to pull it to the base of the 12th figure. The pair remained in place on Monday, with the closing price coinciding with the opening price. Nevertheless, the bullish mood still remains on the EUR/USD pair, and the quotes rally between the middle and upper lines of the Bollinger Bands, as well as above all the lines of the Ichimoku indicator. However, despite such a technical picture, it is advisable to make trading decisions only after the results of tomorrow.